Archivos de la categoría Banca

Far from calming the markets, Spain’s request for a €100 billion loan to bail out its banks has sent Spanish interest rates soaring and led to multiple downgrades from the credit-rating agencies this week.

There’s no question that the Spanish banking sector faces huge problems, thanks to its high exposure to a housing and real-estate market that continues to decline after a massive boom. But the Spanish state, with its own deficits and official unemployment of 25%, cannot afford to save the banks, even with the help of a soft loan from Brussels. This is the clear message from the markets at least.

Fortunately, there is a better solution for Spain’s banks: Instead of a bailout, the Spanish state should force a “bail-in,” in which all of the banks’ subordinated debt and some of its senior unsecured debt is converted to equity. This would reduce the banks leverage and increase the capital available to absorb the coming losses.

First of all, consider the grim fact that even €100 billion may not be enough to put Spain’s banks back on their feet, as they could easily face losses of perhaps three times that amount: Real-estate loans amount to €298 billion, construction credits to €98 billion, mortgages to €656 billion and other loans for families and firms to €683 billion. Assuming a 50% loss in real-estate and construction loans, a 5% loss in mortgages and a 10% loss in other credits to the national private sector, brings us quickly to the worrying figure of €300 billion in losses. And don’t forget the banks’ additional exposure of €78 billion to Portugal and €10 billion to Greece and Ireland, which could add losses of between €40 billion or more to our calculation.

Spanish banks currently report total equity of €377 billion, so losses on this scale would leave them with just €50 billion to €70 billion in remaining equity. To bring them back to reasonable levels of capital would then require €150 billion to €170 billion—well above the €100 billion line of credit that the EU plans to offer. Thus, even if the Spanish government chose to borrow the full amount on offer, national banks would still be undercapitalized by an amount equivalent to two or three years of their pre-provision operating profits.

However, the bigger reason for being skeptical about the success of the EU bailout is not the insufficiency of the loan, but its disproportionate size for an economy, such as the Spanish one, that has already reached its debt saturation point. The fact that our government would have been unable to raise those €100 billion directly from the market shows that at the moment, no private investors believe our solvency. Adding some €100 billion in extra liabilities to an economy whose ability to pay its debts is already in doubt just pushes that economy even closer to default.

Neither the government nor taxpayers can afford even more debt. Spanish economic agents, both public and private, must deleverage themselves by increasing their saving rates and paying down their disproportionately large financial obligations. This is why real public austerity (based on spending cuts, not tax increases) is so important.

Fortunately, Spain’s inability to bail out its banks does not mean that our country must go through a disorderly and devastating national bankruptcy. Which brings us back to the healthier and much cheaper alternative, as the Spanish free market think-tank Instituto Juan de Mariana has recently shown: a forced debt-for-equity swap for the subordinated and senior unsecured liabilities of the Spanish banking system.

Converting into equity 100% of the €88 billion of subordinated liabilities, and 40% of the €160 billion of senior unsecured debt, would generate more than €150 billion of loss-absorbing equity for the Spanish banking system. Together with the estimated €25 billion in expected operating profits for 2012, before loss provisions, that would yield about €175 billion in new bank equity, without increasing the debt burden of the Spanish taxpayer or requiring a loan from Brussels.

In other words, there is a solution to the problems facing the Spanish banking system: not a bail-out, but a bail-in, whereby investors bear the vast majority of the cost of their own mistakes, without liquidating the banks and without pushing the Spanish economy into bankruptcy.

Certainly, a compulsory bail-in may initially cause some turmoil in interbank lending markets. But since the beginning of 2012, Spanish bank financing has already relied heavily on liquidity provided by the European Central Bank. After some time, short-term credit would flow again inside a country with much more robust and solvent financial institutions.